Canadians’ dreary outlook could impede recovery
Canadians are more gloomy about their economy than their G7 peers and that could weigh heavily on the economy’s recovery, says a new report.
Consumer confidence in Canada in 2020 has plunged to four standard deviations below its 2000-19 average. That’s far worse than the United States, which is one SD lower and the U.K. and eurozone, which are 1.5 lower, says Capital Economics.
To get to the roots of this pessimism, Capital Economics looked at where Canadians were before the crisis and how they are faring now.
It doesn’t help that Canadian households entered the pandemic in a weaker financial position. Since the financial crisis of 200809, Americans have brought their debt-to-income ratio down to 136 per cent and their savings rate up to 7.8 per cent. Meanwhile, the same ratio in Canada has climbed to 176 per cent and the savings rate is 3.6 per cent.
Americans are also faring better during the pandemic. Capital Economics
calculates that in Canada, total wages and salaries plunged by 23 per cent from February to April, compared to a 10-per-cent drop in the U.S.
And a lower share of this lost income is being replaced. In Canada, CERB pays out $500 a week, equalling about 45 per cent of median income for full-time workers.
“In the U.S. the current $600 supplement implies the average benefit for unemployment claimants is around $970 per week, or 101 per cent of median full-time earnings,” it said.
The bigger hit to incomes and weaker household finances suggest that consumption will recover more slowly in Canada as the economy reopens, Capital Economics said.
In Canada, it expects consumption to fall 55 per cent annualized in the second quarter and then rise 45 per cent and 35 per cent in the third and fourth quarter. But that would still leave consumption down five per cent year over year at the end of 2020. It expects consumption to fall just three per cent in the U.S.